JPMCB Strategic Property Fund - CFRS

Transcription

Agenda Item: F6
Joint Meeting of the Retirement Boards
Meeting Date: 8/27/2013
JPMCB Strategic Property Fund
Quarterly Report: June 30, 2013
JPMCB Strategic Property Fund1
owns and seeks improved real estate
projects with stabilized occupancies
that produce a relatively high level
of current income combined with
moderate appreciation potential.
The Fund’s investment portfolio focuses
on attractive office, retail, residential
and industrial investments with high
quality physical improvements, excellent
locations and competitive positions within
their markets.
ON THE COVER AND ON THIS PAGE: 3500 WESTLAKE, AUSTIN, TX
3500 Westlake is a 175-unit, 94.3% leased apartment community located on a 16.5-acre site in northwest Austin, less than one mile south of the
Nalle Woods residential community that the Fund acquired in 2010. The property is located in one of Austin’s most affluent neighborhoods, where
tenants have access to all the amenities of the area without the high price of home ownership.
1
Commingled Pension Trust Fund (Strategic Property) of JPMorgan Chase Bank, N.A. (“Strategic Property Fund” or “SPF”).
Second Quarter 2013
Strategic Property Fund (“the Fund”) delivered a second quarter
total gross return of 3.85%, comprised of income of 1.30% and
appreciation of 2.53%. The Fund’s trailing one-year total gross
return was 14.36%.
FINANCIAL HIGHLIGHTS AT JUNE 30, 2013
Net Assets:
$19,397,222,967
Unit Value:
$2,015.63
Gross Asset Value1:
Number of Direct
Real Property
Interests2:
Number of Account
Holders:
The Fund consistently executed on its strategy to maintain
a strong balance sheet, invest in the portfolio, drive income
return, acquire new assets for long-term growth, rebalance the
portfolio and prune assets of lesser quality. The Fund’s size,
quality, consistent pure core strategy, high occupancy, low lease
rollover, solid income, conservative leverage and staggered debt
maturities position the Fund to perform well over the long term.
$25,982,760,200
Investment Performance
AT JUNE 30, 2013
164
20
346
15
14.36
10
8.74
9.07
5.20
5.52
2
Net Assets reflected gross of Fund’s share of debt at
fair value (approximately $6.6 billion).
Percent
5
1
Income
0
Appreciation
Total
8.06
9.01
15.05
3.85
2.53
1.30
2.01
1.10
5.72
9.21
6.82
5.94
2.15
2.06
6.92
-4.39
-5
Direct real property interests and land investments.
-10
(%)
SPF
NFI-ODCE4
Current
Quarter
3.85
3.86
One
Year
14.36
12.17
Three
Years
15.05
14.96
Five
Years
1.10
(0.15)
Ten
Years
8.06
6.94
Fifteen
Years
9.01
7.94
Since
Jan. 983
9.21
8.27
Total returns net of fees were: Current Quarter: 3.60%; One Year: 13.24%; Three Years: 13.92%; Five Years:
0.10%; Ten Years: 7.00%; Fifteen Years: 7.94%; Since Inception: 8.13%. Net returns are based on the
highest applicable fee rate for this strategy. NCREIF Property Index returns were: Current Quarter: 2.87%;
One Year: 10.73%; Three Years: 13.14%; Five Years: 2.79%; Ten Years: 8.60%; Fifteen Years: 8.99%; Since
Inception: 9.26%.
Performance results are gross of investment management fees. Past performance is not a guarantee of comparable future
results. The deduction of an advisory fee reduces an investor’s return. Actual account performance will vary depending on
individual portfolio security selection and the applicable fee schedule.
3
Strategic Property Fund’s inception date.
4
T he NFI-ODCE (NCREIF Fund Index-Open End Diversified Core Equity) is a fund-level capitalization weighted, time weighted
return index and includes property investments at ownership share, cash balances and leverage (i.e. returns reflect the
fund’s actual asset ownership positions and financing strategy).
J.P. Morgan Asset Management | 1
ON THIS PAGE:
425 Lexington Avenue, New York, NY
2 | JPMCB Strategic Property Fund | Quarterly Report: June 30, 2013
To our valued investors,
As you know, I have announced my
retirement after nearly 35 years with
J.P. Morgan so I am able to spend more
time with my family and travel. I want to
take this opportunity to thank you for the
privilege of working with you over the
past 15+ years as the Portfolio Manager
of Strategic Property Fund. We have built
an incredible Fund together, one with
strong underlying fundamentals and a resilient income-focused
portfolio of high quality assets, which I am extremely proud of.
Your partnership and confidence have enabled the Fund to grow
to over $19 billion net and nearly $26 billion gross. I leave you
in good hands with co-portfolio managers, Kim Adams and Ann
Cole, who were added to the Strategic Property Fund portfolio
management team last year and whom I have worked with closely
for more than a decade. For those who may not know Kim and
Ann, please find below a brief summary of their backgrounds.
Kim joined the Strategic Property Fund portfolio management
team in July 2012. Since joining Global Real Assets in 2003, Kim
has served in various investment roles including Sector Head
for office/industrial asset management in the Central region. In
this role, Kim was responsible for leading the asset management
efforts for the region’s office and industrial holdings, a $5.0
billion portfolio in gross value totaling approximately 66 million
square feet. Previously, Kim served as a senior asset manager
in the retail group as well as in the East/South region and as an
acquisitions officer in the Midwest region. Earlier in her career,
Kim worked for Prudential Real Estate Investors and LaSalle
Investment Management. Kim received a B.A. in economics
from Northwestern University and an M.B.A. from the Kellogg
Graduate School of Management. She serves as a board member
of NAIOP Chicago, a council member for the Urban Land Institute
and is a member of PREA.
Ann also joined the Strategic Property Fund portfolio
management team in July 2012. Since 1989, Ann has held various
positions in our Real Estate Asset Management team including
Sector Head of our office/industrial East (more than $4 billion in
assets) and West (more than $3 billion in assets) regions. Ann has
extensive experience with the acquisition, asset management,
development and disposition of institutional quality real estate
and was responsible for overseeing the development of Strategic
Property Fund’s 2000 Avenue of the Stars in Los Angeles. Ann
also served as a Client Portfolio Manager on the Marketing and
Client Strategy team, where she advised clients on real estate
investment strategies. Ann has a B.B.A. in accounting from Pace
University and passed the March 1987 CPA examination. Ann
holds the NASD Series 7 and 63 licenses, is an active participant
in NAREIM and is a member of PREA.
As Kevin Faxon mentioned in his letter to you in July, expect a
seamless transition. I have been working closely with Kim and
Ann on the management of Strategic Property Fund over the
past year in preparation for the day when they would become
my successors. The time has come; they are more than ready to
take over as co-portfolio managers. I have complete confidence
in their talent and ability to continue leading Strategic Property
Fund and working with you. Please join me in congratulating Ann
and Kim on this important promotion.
Thank you so very much for your well wishes since the
announcement. Most of all, thank you for a cherished 15+
years of serving you.
Sincerely,
Anne S. Pfeiffer
Senior Portfolio Manager
National Economic Overview
Real estate demand drivers are improving across the U.S.
Employment grew at an average monthly rate of 202,000 in
the first half of 2013, up from 185,000 during the same period
last year. Although government spending cuts have been a drag
on the economy, private sector growth has ramped up with
considerable support from the strengthening housing market,
more than compensating for the government pullback. If job
creation is sustained at current levels, it will steadily reduce
unemployment even factoring in stronger growth in the labor
force. Moody’s Analytics forecasts a return to full employment—
a jobless rate of approximately 5.7%—within three years.
We expect the recovery in real estate fundamentals, helped by
historically low construction outside of multifamily, to continue
broadly across markets and sectors. All major property types
are generating positive net operating income growth. We think
that pricing for core real estate is generally fair, but full, and
underwriting IRRs are stabilizing. A back-up in interest rates is
necessary to prevent frothy pricing. We expect that total core
returns, assuming 25% leverage, will average in the 7% to 8%
range over the next three years.
Real Estate Capital Markets
Overall, expected returns for newly underwritten core property
transactions have dipped to pre-recession lows on an unleveraged
basis. However, the spread between these unleveraged IRRs and
the rate at which they can be levered is much wider today than
it was before the recession. This suggests that if interest rates or
spreads rise sharply, the spread between these IRRs and the rates
at which they can be financed is sufficiently wide to absorb the
impact. We believe it is constructive and healthy for the market
for interest rates to rise. The spread between IRRs and the rate
at which they can be mortgaged is too wide and needs to narrow.
We believe it is better for the market if that spread is closed by
interest rates rising rather than underwriting IRRs falling.
In the short term, the impact of rising rates on real estate
capitalization rates is likely to be minimal. Historically, there has
been little correlation between the movements of interest rates
and real estate cap rates. Rising interest rates are generally
consistent with an improving economic environment in which
vacancies can be filled, rents raised and real estate cash flows
Direct Real Property Interests Diversification
AT JUNE 30, 2013
DIVERSIFICATION IS BASED UPON FUND’S NET EQUITY VALUE 1
DOLLARS IN MILLIONS
WEST
Office
Industrial
Residential
Retail
MIDWEST
Office
Industrial
Residential
Retail
1
$7,414.4
3,465.2
465.4
1,519.6
1,964.2
$804.1
40.2%
18.8%
2.5%
8.2%
10.7%
4.4%
– 0.0%
317.3 1.7%
212.9 1.2%
273.9 1.5%
Direct real property interests only, excluding land investments.
TOTAL
Office
Industrial
Residential
Retail
EAST
$18,428.0
8,925.0
1,603.5
4,259.7
3,639.8
$5,786.2
Office
Industrial
Residential
Retail
2,968.9
104.1
1,903.5
809.7
SOUTH
$4,423.3
Office
Industrial
Residential
Retail
100.0%
48.4%
8.7%
23.1%
19.8%
31.4%
16.1%
0.6%
10.3%
4.4%
24.0%
2,490.9 13.5%
716.7 3.9%
623.7 3.4%
592.0 3.2%
N AT I O N A L E C O N O M I C OV E R V I E W
enhanced, muting the negative impact of the rising rates. In the
long term, unlevered core real estate IRRs appear sustainable at
roughly 6.5% to 7.5%, provided two conditions are met:
• 10-year Treasury yields stabilize at 4.5% to 5.0% over the
next five years. This rate, plus a 200 to 300 basis point spread
(consistent with historical core real estate premiums over
normalized, risk-free Treasury rates), suggests current real
estate prices, in general, have a cushion against moderate
rate increases.
• Real estate returns maintain a reasonable spread to competing
assets (BBB bonds) and mortgage rates (for 65% loan-to-value
commercial mortgages). Today, those spreads are historically
wide, leaving room for some tightening as rates rise.
neighborhoods that appeal to a well-educated and well-paid
Gen Y renter-by-choice. While the sector does not appear to
be broadly threatened by overconstruction, given the narrow
development focus of this cycle, we anticipate that pockets of
oversupply will emerge over the next 18 months, causing rents to
flatten or even decline in some submarkets.
Class B and C properties have recently generated stronger
rent growth than Class A properties. One reason for this is
that existing Class A properties face more direct competition
than lower quality properties from the new projects coming on
line, which frequently command top-of-market rents. In many
markets, Class A properties have already pushed rents to levels
where further increases would be firmly resisted. Finally, the
residents of B and C properties are less likely to qualify for
mortgages than residents of Class A properties and thus are
more likely to stay where they are.
Real Estate Sector Review
Office Sector
Residential Sector
Nationally, apartment occupancy is close to 95%, the highest
since 2006. Having slowed in recent quarters, rent growth
reaccelerated slightly in the second quarter, due primarily to
ongoing economic strength in areas with high exposure to
information technology and energy. Year-over-year rent growth
is now approximately 3.5% versus 3.2% six months ago. The
Denver, Seattle, Portland, Houston and San Francisco Bay Area
markets all delivered better than 6% year-over-year rent growth.
As new supply picks up somewhat and homeownership stabilizes,
we expect apartment rent growth to resume its deceleration.
Apartment starts continue to be heavily concentrated in urban
The office market continued to make slow, steady progress
through the second quarter of 2013, evidenced by a 20 basis
point drop in the national vacancy rate. Supply-side restraint has
been critical to the continued decline in vacancy. The volume of
construction today is historically low, just a quarter of what it
was at this point in the last cycle. Absent the lid on development,
vacancy would probably be trending up as leasing has been
lackluster in several dominant markets including Manhattan
and Washington, D.C. In New York, large financial institutions
continue to place whole floors of excess space back on the market,
while large law firms are demanding more efficient occupancy,
Real Estate Diversification by Life Cycle
Real Estate Diversification by Investment Structure
AT JUNE 30, DOLLARS IN THOUSANDS
AT JUNE 30, DOLLARS IN THOUSANDS
Development
$364,906
2.0%
Leasing
$239,513
1.3%
Stabilized
$17,863,931
96.7%
2
Joint Venture
$8,089,869
43.8%
Wholly Owned
$10,378,481
56.2%
Direct real property interests and land investments.
N AT I O N A L E C O N O M I C OV E R V I E W
often downsizing when they renew or enter into new leases. In
Washington, spending cuts related to sequestration and slower job
creation have also resulted in less office space being leased.
For the most part, rent growth has been anemic in this cycle
outside of the energy and technology-heavy markets. Following
an exceptionally strong run-up in rents, rent growth in the techdominated San Francisco Bay Area markets is now decelerating.
At the same time, the Southern California markets are beginning
to pick up momentum, exemplified by Los Angeles’s Westside,
which is once again experiencing positive absorption and firming
asking rents after a long period of dormancy. Markets badly
afflicted by the excesses of the housing bust, including Southeast
Florida, Atlanta, Las Vegas and Phoenix have been especially
slow to rebound. While they are now improving, most still are
some distance from equilibrium.
Retail Sector
Overall retail sales growth was moderate in the second quarter.
Same store sales growth is slowing, though the discrepancy
between the results of luxury and all others remains marked,
mirroring the income gap. Higher-end retailers continue to
generate much stronger sales growth than discounters and
other retailers serving less affluent customers. Mall owners are
finding that with their better sales results, luxury retailers not
only can pay higher starting rents, but they also have a greater
tolerance for rent increases during the term than their lowerend counterparts. Consequently, the competition to attract
high-end tenants is intense.
The retail sector is grappling with the all-important question of
how to continue to lure consumers into stores, even as the share
of sales that are made through the internet rises. One answer
is to lease less space to sellers of goods and more to services
requiring face-to-face contact, which comprise a substantial
share of U.S. consumption. Accordingly, restaurants, banks
and financial advisors, showrooms, medical clinics and other
personal services will have a greater presence in shopping
centers than in the past.
Warehouse/Industrial Sector
Even after twelve consecutive quarters of positive net absorption,
the warehouse market does not appear to be winding down. The
national availability rate dropped 40 bps in the second quarter
to 12.2%, which is 130 bps below the year-ago level. Nearly all
metro markets have tightened since the start of the year. While
asking rents have firmed slightly overall, rent trends vary quite a
bit across markets.
Demand has been strongest in very large (500,000+ square
feet) functional boxes. The clear preference is for recently
constructed facilities featuring high clear heights and crossdocking with ample truck court and parking areas. These
facilities often serve as single locations filled with sophisticated
picking systems that allow retailers to distribute to their stores
as well as to individual consumers who purchase online. Many
large e-retailers are following Amazon’s lead with site selection
criteria that include the ability to reach major population hubs in
a single day and easy access to well-developed highway systems
and to inexpensive labor as the activities conducted in these
facilities frequently are labor intensive. Additional considerations
include low land values and availability of property and other tax
incentives and foreign trade zones. Locations with these features
are not often supply-constrained, however, so rent growth may
be minimal going forward.
Appraisal Assumptions3
Property Type
Office
Industrial
Retail
Residential
3
June 30, 2013
Discount Rate (%)
Terminal Cap Rate (%)
7.39
6.60
7.62
6.96
7.44
6.41
7.02
5.61
Rates are weighted based on gross asset value.
March 31, 2013
Discount Rate (%)
Terminal Cap Rate (%)
7.47
6.67
7.83
7.08
7.54
6.51
6.99
5.69
Portfolio Returns
Strategic Property Fund continues to deliver consistent
positive performance and solid income. The second quarter
total gross return was 3.85%, comprised of income of 1.30%
and appreciation of 2.53%. The Fund’s trailing one year total
gross return of 14.36%, was comprised of income of 5.20%
and appreciation of 8.74%. The Fund currently represents
approximately 20% of the ODCE index (an index of core openend funds) and continues to perform well against its peer
group. The Fund outperformed ODCE over the one-, three-,
five-, ten- and 15-year, and since inception time periods by 219
bps, 9 bps, 125 bps, 112 bps, 107 bps and 94 bps, respectively.
The size, quality and location of our assets continue to deliver
strong returns to our investors. In particular, the strength of
Strategic Property Fund’s large office assets in primary markets
and super regional malls continues to differentiate the Fund and
was again a key contributor to the strong performance.
Quarterly valuation of direct real estate resulted in appreciation
of $427.3 million (229 bps). For the second consecutive quarter,
the office and retail sectors represented a significant portion
of the direct real estate value increase (68.5% this quarter). A
debt mark to market adjustment contributed to appreciation of
SUNNYVALE CITY CENTER, SUNNYVALE, CA
$47.6 million (25 bps). In general, improvements in the Fund’s
underlying fundamentals, such as increased rents and leasing
momentum across all sectors, and capital markets contributed
to the appreciation this quarter. Over the past year, the Fund’s
net operating income has played an increasing role in driving
value gains and the NOI after debt service for comparable
properties has increased by 6.9%.
The office sector delivered the largest value increase with a
gain of $170.4 million (91 bps) and a leveraged total return
of 3.67%, comprised of an income return of 1.49% and
appreciation of 2.16%. In New York City, the value at 200 Fifth
Avenue increased primarily due to favorable leasing activity
from the office asset’s retail suites, in particular, renewals at
rents higher than pro forma. Additionally, more aggressive
capital markets assumptions reflecting recent comparable
transactions contributed to the valuation increase. In Southern
California, the values of Century Plaza Towers and Bluffs at
Playa Vista increased significantly due to increased market rent
projections and recent comparable transactions supporting
higher valuations. In Silicon Valley, the value at Sunnyvale City
Center increased due to continued rent growth and investor
demand for high quality assets in that market.
CENTURY PARK, LOS ANGELES, CA
PORTFOLIO RETURNS
The retail sector followed with a gain of $122.1 million (65 bps)
and a leveraged total return of 5.50%, comprised of an income
return of 1.38% and appreciation of 4.08%. The two entity level
retail investments, Edens and Donahue Schriber Realty Group
(DSRG), experienced healthy appreciation due to decreases in
cap rates. The first half of 2013 showed investor demand for
quality retail continuing and extending to secondary markets.
Power centers and grocery–anchored neighborhood and
community centers were all in demand.
The residential sector generated a gain of $93.4 million (50
bps), which translated into a leveraged total return of 4.08%,
comprised of an income return of 1.24% and appreciation
of 2.82%. The Chicago CBD residential market continues
to see strong leasing velocity and rent growth, which is
trending ahead of expectations. At the Coast Apartments, the
valuation further increased, as the asset achieved substantial
completion. In Washington, D.C., the increase in value
among the Capitol Yards portfolio (70, 100 and 909) was a
combination of lower exit rates and lower economic vacancy.
The D.C. multifamily market continued to be aggressively
pursued by buyers during the first half of the year. The sales
comparables that closed signaled to appraisers that more
aggressive exit pricing was appropriate. Overall, multifamily
properties in urban locations of major cities that are near
public transportation continue to be in high demand.
The industrial sector posted an increase of $41.4 million
(22 bps) with a leveraged total return of 4.15%, comprised
of an income return of 1.43% and appreciation of 2.69%.
BRIDGEWATER COMMONS, BRIDGEWATER, NJ
Fundamentals in the industrial space continue to improve in
major markets. The Alliance Texas and South Bay Industrials
portfolios benefited from strong leasing momentum and rent
growth in the Fort Worth and Southern California markets. At
Alliance Texas, major new leases in the last quarter included
Walmart (78,000 square feet), Motorola/Google (450,000
square feet) and NFI Logistics/Colgate (473,000 square feet).
Moreover, significant renewals such as the National Rail Service
(300,000 square feet) and Exel Logistics/Texas Instruments
(410,000 square feet) added to the long term durable income
stream of the Fund. During the first half of 2013, the Fund’s
industrial portfolio experienced substantial value increases due
to the increased occupancy from credit tenants as well as a
broad increase in investor demand for stable industrial assets,
leading to lower required returns for high quality assets.
Earlier in this section of the report, we referenced Strategic
Property Fund’s outperformance to the ODCE index. Starting in
2013, the Fund changed its official benchmark from NPI to NFIODCE. NFI-ODCE is a broad based fund-level index of core open
end funds and takes into account leverage, the ownership
percentage in joint venture structures and cash holdings. The
Fund’s investors as well as many of our peers in the industry
are utilizing NFI-ODCE in their performance measurement.
Accordingly, Strategic Property Fund has adopted the NFIODCE Value Weighted Index as its official benchmark to use
as a comparison to how the Fund is performing versus other
funds with stated “core” strategies. We believe the current
year is a good time to change as we are neither in a peak nor
trough of the real estate cycle.
ALLIANCE GATEWAY 11, FORT WORTH, TX
Portfolio Activity
Strategic Property Fund deployed $848.2 million of equity to
acquire five investments in New York City, San Diego and Austin.
In midtown Manhattan, the Fund invested $464.8 million of
net equity to acquire 425 Lexington Avenue, a 700,718-squarefoot Class A office building (including approximately 14,000
square feet of retail space) adjacent to Grand Central Terminal
spanning the full street block from 43rd to 44th Street on
Lexington Avenue. The building is 99.8% leased to high credit
tenants with a weighted average remaining lease term of 16.1
years, mitigating any potential leasing risk in the near future.
Grand Central Terminal is a major hub for commuters across the
New York metro area and Connecticut. The building is one of
the newest high rise office towers in midtown Manhattan with
amenities required by tenants, such as convenient access to mass
transit, fine dining and retail. The Grand Central submarket is
home to corporate headquarters of numerous financial service
institutions and Fortune 500 companies and it commands some
of the highest rents in the city.
Also in midtown Manhattan, the Fund acquired 125 West 55th
Street, a 590,628-square-foot, 98.1% leased Class A office
building at the confluence of the Westside and 6th Avenue/
Rockefeller Center submarkets, for $273.9 million of equity.
The building is one of the newest in its area and offers its tenants
column-free floor plates and flexible workspaces. The property’s
Midtown location provides tenants with access to the area’s
concentration of corporate clients and service providers, as
well as extensive amenities found within the Plaza District, Sixth
Avenue/Rockefeller Center and Columbus Circle submarkets. The
site is proximate to hospitality, dining, cultural and recreational
amenities including the Shops at Columbus Circle, Museum of
Modern Art, Carnegie Hall and Central Park. The location is also
within walking distance of New York’s most heavily trafficked
destination retail corridors. Commuters have transportation
access to 10 subway lines within a five–block radius of the
property. In the Midtown South submarket of Manhattan, the
Fund invested an initial $1.6 million of equity into the Hudson
Yards South Tower development project. Upon completion in
2016, the Class A, 1.8 million-square-foot office tower will be the
first building in the master-planned Hudson Yards redevelopment
along the Hudson River. The tower will be among the newest,
most technologically advanced and most energy efficient office
buildings in New York City. The building will be 47 stories in height
and will seek a LEED Gold certification.
Diversification by Property Type
Diversification by Property Location
AT JUNE 30, 2013
AT JUNE 30, 2013
Office
Industrial
Residential
Retail
100
Hotel
East
100
2.4
19.8
80
24.8
8.7
13.8
40
20
48.4
35.5
Midwest
9.5
40.2
35.2
60
40
20
24.0
21.2
31.4
34.1
SPF
NPI*
0
0
SPF
4
Percent
Percent
60
West
23.5
80
23.1
4.4
South
NPI*
Direct real property interest only, excluding land investments.
* NCREIF Property Index
PORTFOLIO ACTIVITY
In downtown San Diego, the Fund invested $68.3 million of
equity in The Lofts Portfolio, comprised of 460 units in three
Class A residential buildings and a combined 23,938 square feet
of ground-floor retail space. The Portfolio is 92.2% leased and
the three buildings are located within four blocks of each other
in downtown’s East Village neighborhood. Situated on G Street
between Sixth and Tenth Avenues, the buildings are located to
the east of the Gaslamp District and north of the ballpark, with
immediate access to neighborhood amenities, restaurants and
shopping and convenient access to area attractions, employment
centers and regional freeways. In Austin, the Fund acquired
3500 Westlake, a 175-unit Class A residential community, for
$39.6 million of equity. It is located less than one mile south
of the Fund’s Nalle Woods residential community in northwest
Austin that was acquired in 2010. The property has convenient
access to several natural amenities including Lake Austin and the
Barton Creek Green Belt. Accordingly, the property offers great
views of the wooded Texas Hill Country and the surrounding
bluffs. Residents have an easy commute to Austin’s southwest
employment center as well as downtown. Additionally, the
property is adjacent to the San Clemente office park, which
contains the headquarters of VM Ware and Bazaarvoice.
total sales proceeds. Given the vintage age of the asset and a
potentially risky major tenant, the Fund seized the opportunity
to sell the asset while there was significant interest from
buyers seeking quality core products in this market. Also
of note, the Fund sold Arcadia Cove, a 432-unit apartment
community in Phoenix, which yielded net proceeds of $34.4
million. Due to the asset’s below-average long-term growth
potential, age and capital needs, the Fund took advantage of
the favorable market environment to sell the asset.
While capital markets continue to contribute to increased values
across the portfolio, the Fund’s NOI has played an increasing role
in driving appreciation gains. In the second quarter, Strategic
Property Fund’s occupancy increased to 93.4% from 92.7% in
the first quarter; occupancy was 91.9% a year ago. Comparable
property NOI grew by 1.4% quarter-over-quarter and more than
6% since last year. Leasing increased across all sectors. The
retail sector remains strong at 94.0% leased followed closely by
the office sector at 93.8%. The residential sector was at 92.9%
leased and the leasing in the industrial sector, which has been
asset management’s focus for several quarters, now exceeds
90% and ended the quarter at 91.4%; an increase from 86.4%
at this time last year.
The Fund continued to show its discipline in rebalancing and
refining the composition of the overall portfolio. As a result,
disposition activity yielded total net proceeds of $263.0
million, which included the sale of an office building and a
residential asset, partial sales of the 7950 Professional Center
portfolio and the repayment of the Lakeshore East land loan
receivable. The sale of 225 West Wacker, a 650,812 square-foot
office building in the West Loop submarket of Chicago yielded
net proceeds of $212.8 million, representing 80.9% of the
Overall, our asset management team continues to proactively
execute on blend and extend strategies with existing tenants
where appropriate and identify creative ways to work with
leasing tenants. Moreover, to further enhance the value of the
portfolio, our asset managers constantly review each asset for
its marketability, tenant experience and opportunities to drive
interest and rents and make improvements where suitable. To
highlight two residential leasing successes from the second
THE LOFTS AT 655, SAN DIEGO, CA
THE LOFTS AT 707, SAN DIEGO, CA
PORTFOLIO ACTIVITY
quarter, first, the Coast Apartments, a new 515-unit development
project in the Lakeshore East neighborhood of Chicago that
delivered in March 2013, is leasing extremely well. The property
is 66% leased and is currently averaging 48 leases per month
with rents that are 14% ahead of pro forma. Second, The District,
a 125-unit new building in the 14th Street corridor of Washington,
D.C. that the Fund purchased vacant in March 2013, is also leasing
extremely well. In the face of new supply coming on line in D.C.,
the property is 66% leased with rents 6% higher than pro forma,
in less than four months.
Portfolio leverage increased to 24.9% at the end of the quarter.
The Fund expects to repay its Freddie Mac loans upon maturity
in August and place new debt on select assets, which should
bring the Fund’s leverage within its target range of 25% to
30%. Investment–level debt coming due over the next 12, 24
and 36 months is very manageable at 4.3%, 3.8% and 2.9%
of net asset value, respectively. The weighted average cost
of capital is 4.5%, with 78.6% of our loans at fixed rates and
secured by real estate assets.
The cash position, a main focus this year, was successfully
decreased to 3.7% of the Fund’s net asset value at quarter end,
within the Fund’s target of 3% to 5%. Investor demand for high
quality real estate is strong; the Fund continued to receive strong
client commitment and added $410.4 million of new commitments
to the contribution queue. The contribution queue was $2.4 billion,
12.6% of the Fund’s net asset value, at quarter end. On July 3, the
Fund received $543.3 million of client capital, which decreased
the contribution queue to $1.9 billion, 9.8% of the Fund’s net asset
value. The Fund remains open to new investor capital. The focus
remains on selecting appropriate assets at appropriate prices,
pruning assets that no longer meet our criteria for quality and
market position and keeping cash at a level that does not drag
performance. Thus, the current estimated timeframe for calling
capital for new commitments is approximately 12 months. The
Fund honored $258.1 million in distributions for cash flow, fees
and redemption requests.
OCCUPANCY LEVEL BY PROPERTY TYPE 5
Sector
Office
Industrial
Residential
Retail
Total
5
Calculated based on leased occupancy and weighted by net asset value.
Percent
93.8
91.4
92.9
94.0
93.4%
For the balance of the year, we will continue to focus on acquiring
assets consistent with the Fund’s strategy for long-term growth
(i.e., focus on infill, live/work/play and renter-by-choice locations
in major markets and industries), bringing leverage to within
the Fund’s target range of 25% to 30% (i.e., take advantage of
the current interest rates and refinance or place new debt on
select assets), maintaining the cash position within 3% to 5% of
net asset value and keeping a strong balance sheet to invest in
the portfolio in order to drive income return. Thank you for your
continued confidence and support.
Anne S. Pfeiffer
Senior Portfolio Manager Kimberly A. Adams
Portfolio Manager
Ann E. Cole
Portfolio Manager
LEASING EXPIRATION BY PROPERTY TYPE 6
AT JUNE 30, 2013
Office
Industrial
Retail
Total
6
2013
2014
4.1
5.5
3.8
13.2
6.3
9.5
4.7%
9.5%
2015
6.3
12.0
9.2
9.3%
2016
8.7
13.2
8.9
10.4%
2017
10.6
9.7
9.8
10.0%
Calculated based on square feet, excludes Residential.
Financial Statements and Notes
For the three-month and nine-month periods ended June 30, 2013
(unaudited)
Statement of Net Assets
AS OF JUNE 30, 2013
DOLLARS IN THOUSANDS, EXCEPT UNITS AND UNIT VALUE
ASSETS
Investments in real estate assets at fair value
Cash and cash equivalents
Other assets and accrued income
Total assets
LIABILITIES
Other liabilities
Total liabilities
NET ASSETS
At fair value
Outstanding units
Unit value
$18,680,490
711,237
6,032
19,397,759
536
536
$19,397,223
9,623,422
$2,015.63
The accompanying notes are an integral part of these financial statements.
Statement of Operations and
Changes in Net Assets
DOLLARS IN THOUSANDS
FOR THE THREE MONTHS
ENDED JUNE 30, 2013
FOR THE NINE MONTHS
ENDED JUNE 30, 2013
$244,688
644
245,332
$701,560
1,304
702,864
(1,580)
(202)
243,550
(2,622)
(606)
699,636
524
(17,058)
17,582
38,437
(54,699)
93,136
458,616
476,198
1,049,442
1,142,578
719,748
1,842,214
(258,079)
(258,079)
(573,791)
(573,791)
461,669
1,268,423
NET ASSETS
Beginning of period
$18,935,554
$18,128,800
End of period
$19,397,223
$19,397,223
INVESTMENT ACTIVITY
Investment income
Income from investments in real estate assets
Interest and other income
Total investment income
General fund expenses
Line of credit fees
Net investment income
Realized and unrealized gain on investments
Realized gain on investments sold
Less: Previously recorded unrealized loss on investments sold
Net gain recognized on investments sold
Unrealized gain on investments held at end of period
Net realized and unrealized gain on investments
Increase in net assets resulting in operations
PARTICIPANT ACTIVITY
Withdrawals by participants
Net participant activity
Increase in net assets
Statement of Cash Flows
FOR THE THREE MONTHS
ENDED JUNE 30, 2013
FOR THE NINE MONTHS
ENDED JUNE 30, 2013
$243,550
$699,636
(68,242)
1,287
220
176,815
(207,195)
4,841
311
497,593
INVESTING ACTIVITIES
Contributions to investments in real estate assets
Distributions from investments in real estate assets
Proceeds from dispositions of investments in real estate assets
Deposits for pending transactions in real estate assets
Net cash flows used in investing activities
(937,205)
15,165
246,505
(211)
(675,746)
(1,828,829)
213,449
681,634
(211)
(933,957)
FINANCING ACTIVITIES
Withdrawals by participants
Net cash flows used in financing activities
(258,079)
(258,079)
(573,791)
(573,791)
Net decrease in cash and cash equivalents
(757,010)
(1,010,155)
Cash and cash equivalents, beginning of period
1,468,247
1,721,392
$711,237
$711,237
$-
$404
$9,855
$6,389
OPERATING ACTIVITIES
Adjustments to reconcile net investment income to net cash flows
provided by operating activities
Undistributed income from investments in real estate assets
Decrease in other assets and accrued income
Increase in other liabilities
Net cash flows provided by operating activities
Cash and cash equivalents, end of period
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS AND NON-CASH INFORMATION
Cash paid during the period for line of credit fees
Non-cash reclass of real estate investments from other assets
Schedule of Investments
AS OF JUNE 30, 2013
Property Name
OFFICE
101 Constitution
125 W55th Street
1285 Avenue of the Americas
1501 K St.
171 Seventeenth Street
1918 Eighth Avenue
200 Fifth Avenue
2000 Avenue of the Stars
224 Building
3801 PGA Boulevard
425 Lexington
700-900 Concar Drive
7950 Professional Center
818 Stewart Street
888 Walnut Street
Advanta Office Commons
Alliance Texas
Boylston West LLC
Brewery Blocks
Century Plaza Towers
China Basin
Corporate Center Office Park
Crescent Office
Downtown Doral Office Portfolio
Fairway Office Center
Foundry III
Fountain Place
Four Houston Center and Shops
Franklin Park
Hudson Yards
Irvine Oaks
La Jolla Commons
Landmark Center
Las Olas City Centre
Metropolitan Midtown
Minuteman Park
Network Drive
One and Two Houston Center
Park Place at Bay Meadows
San Rafael Corporate Center
Sanctuary Park
Southeast Financial Center
Sunnyvale City Center
Terminus Portfolio
The Bluffs at Playa Vista
The Water Garden
Three Houston Center
1
Year acquired is reported in calendar years.
2
Cost amounts include undistributed income.
Year Acquired1
Location
Net Cost2
Net Fair Value
2007
2013
2001
2006
2006
2011
2011
2004
2012
2006
2013
2007
2010
2011
2007
2010
2010
2012
2007
1997
2011
1998-99/2007
2004
1995/2010
2006
2012
2004
2004
2011
2013
1999
2011
2011
2011
2013
2006
2012
2004
2007
2007
1997
2007
2007
2013
2011
1995
2005
Washington, D.C.
New York, NY
New York, NY
Washington, D.C.
Atlanta, GA
Seattle, WA
New York, NY
Los Angeles, CA
Portland, OR
Palm Beach Gardens, FL
New York, NY
San Mateo, CA
Doral, FL
Seattle, WA
Pasadena, CA
Bellevue, WA
Fort Worth, TX
Boston, MA
Portland, OR
Los Angeles, CA
San Francisco, CA
Franklin, TN
Dallas, TX
Doral, FL
Palm Beach Gardens, FL
San Francisco, CA
Dallas, TX
Houston, TX
Franklin, TN
New York, NY
Irvine, CA
La Jolla, CA
Boston, MA
Fort Lauderdale, FL
Charlotte, NC
Andover, MA
Burlington, MA
Houston, TX
San Mateo, CA
San Rafael, CA
Alpharetta, GA
Miami, FL
Sunnyvale, CA
Atlanta, GA
Los Angeles, CA
Santa Monica, CA
Houston, TX
$205,681
277,880
180,498
284,557
181,315
330,286
340,863
19,134
65,231
60,553
465,005
101,340
6,030
129,386
128,721
240,255
19,171
113,465
134,824
107,074
222,718
185,843
189,212
43,148
65,789
81,089
206,512
166,820
26,035
1,642
75,095
137,240
315,490
83,586
39,340
235,371
211,271
250,351
153,788
158,829
291,653
531,802
284,781
74,526
296,129
7,656
126,123
$239,447
280,496
464,144
271,209
129,135
346,172
409,784
101,365
67,947
7,642
463,187
116,231
4,431
133,035
111,995
256,995
26,852
113,027
124,314
298,683
279,938
201,331
202,842
29,124
24,445
80,955
156,592
179,188
27,637
264
55,522
190,147
287,314
84,524
39,142
181,961
218,899
336,516
120,429
106,417
257,199
416,440
306,284
76,303
315,064
90,756
229,456
Schedule of Investments (cont.)
AS OF JUNE 30, 2013
Property Name
Year Acquired1
Location
Trammel Crow Center
Water Garden II
2004
2001
Dallas, TX
Santa Monica, CA
Total Office
INDUSTRIAL
Alliance Texas
Andrew Corporation Building
Best Buy Distribution Center
Big 5 Distribution Center
DCT Industrial Portfolio
Dugan Texas
Greater Los Angeles Industrials
Kraft Industrial Portfolio
Lakemont Industrial Portfolio
Metro Chicago Industrial Portfolio
Metro Chicago Industrial Portfolio II
Pompano Business Center
Rialto Commerce Center II & III
South Bay Industrials
Total Industrial
1
2
2010
2007
2007
2006
2007
2000
1994-95,1999
2006
2000
2007
2007
2007
2007
1996
Fort Worth, TX
Chicago Metro Area, IL
Riverside, CA
Various
Dallas Metro Area, TX
Various, CA
Aurora, IL
Charlotte, NC
Pompano Beach, FL
Rialto, CA
Los Angeles, CA
Net Cost2
Net Fair Value
112,565
272,898
101,273
362,931
$8,238,571
$8,924,984
$445,210
65,331
21,413
47,241
225,754
154,483
170,281
126,921
80,106
106,794
28,554
29,665
97,849
41,231
$1,640,833
$484,929
62,344
16,344
52,892
173,079
140,863
233,696
111,076
84,992
72,268
19,102
11,723
67,378
72,833
$1,603,519
AS OF JUNE 30, 2013
Property Name
Year Acquired1
Location
RESIDENTIAL
100 at Capitol Yards
1330 Boylston
3500 Westlake
425 North Boylan
70 at Capitol Yards
712 Tucker
909 at Capitol Yards
Anaheim Hills
Aqua
Ascent at City Center
Avenel at Montgomery Square
Bluffs at Highlands Ranch
Brewery Blocks
Broadstone Scottsdale Waterfront
Brownstones at Englewood South
Cape May at Temecula
Capitol At Chelsea
Coast Apartments
Cordoba Phase I & II
Domain at City Centre
Doral West
Elizabeth Square
Equinox Apartments
Fairways at Raccoon Creek
Gaslight Commons
Glenmuir
Grand Isle
Jacaranda
Laguna Niguel Apartments
Liberty Towers
Lincoln at LaVillita
Lincoln Lakeside
Lindbergh Vista
Mission at La Villita
Mission Bay Block 3W
Mosaic South End
Nalle Woods
One City Place
Palazzo Park La Brea Portfolio
2012
2008
2013
2011
2012
2010
2012
2006
2010
2010
2006
2007
2007
2012
2008
2004
2002
2011
2010, 2011
2010
2006
2010
2010
2007
2003
2007
2011
2011
2006
2011
2006
2009
2010
2006
2010
2011
2010
2004
2007
Washington, D.C.
Boston, MA
Austin, TX
Raleigh, NC
Washington, D.C.
Raleigh, NC
Washington, D.C.
Anaheim, CA
Chicago, IL
Houston, TX
North Wales, PA
Denver, CO
Portland, OR
Scottsdale, AZ
Englewood, NJ
Temecula, CA
New York, NY
Chicago, IL
Doral, FL
Houston, TX
Doral, FL
Charlotte, NC
Seattle, WA
Denver, CO
South Orange, NJ
Naperville, IL
Murrieta, CA
Fullerton, CA
Laguna Niguel, CA
Jersey City, NJ
Irving, TX
Irving, TX
Atlanta, GA
Irving, TX
San Francisco, CA
Charlotte, NC
Austin, TX
White Plains, NY
Los Angeles, CA
1
2
Net Cost2
Net Fair Value
$96,667
42,655
39,712
17,024
170,418
30,839
97,853
23,064
79,665
12,103
39,941
53,721
77,828
18,046
138,535
23,810
81,322
49,299
34,401
65,574
18,024
66,440
56,203
20,903
38,324
22,976
32,550
17,811
144,403
30,084
17,149
53,272
20,912
41,602
44,309
40,702
122,381
224,659
$100,689
52,829
39,653
16,843
175,262
36,494
97,325
18,241
99,669
13,503
26,194
58,459
76,169
17,989
88,570
37,177
148,986
77,532
44,119
10,623
57,179
26,081
72,081
61,196
40,077
35,670
24,772
30,989
20,706
163,899
38,195
28,453
49,685
28,673
43,663
47,949
49,295
131,679
197,282
AS OF JUNE 30, 2013
Property Name
Year Acquired1
Location
RESIDENTIAL (CONT.)
Park at Research Forest
Park Lane Seaport Residential
Pasadena Apartments
Pine Creek Ranch Apartments
Pinnacle at DTC
Pinnacle at Mountain Gate
Pinnacle at Union Hills
Pinnacle Terrace
Polo Lakes Apartments
Promenade Rio Vista
Rancho Santa Margarita
Riverwalk at Millennium
Seacliff
Siena Park
South Orange Transit Village
Springfield Station Apts.
St. Johns Wood Apartments
Stevenson Ranch
Strata
Temecula Phase I & II Apartments
Terra Vista
The Circle at Hermann Park—Amalfi
The Circle at Hermann Park—Esplanade
The District
The Lofts Portfolio
The Reserve at 4S Ranch
Triangle Block F
Triangle Residences Portfolio
Trillium
Trilogy (The Residences at Fenway)
Trinity Bluff Portfolio
Valencia
Total Residential
2003
2010
2006
2006
2006
2006
2006
2006
2002
2003-2004
2006
2006
2006
2010
2013
1999
1998
2006
2010
2006
2006
2011
2006
2013
2013
2012
2010
2006/2007
2007
2006
2011/2012
2006
Houston, TX
Boston, MA
Pasadena, CA
Houston, TX
Denver, CO
Denver, CO
Phoenix, AZ
Phoenix, AZ
Wellington, FL
San Diego, CA
Rancho Santa Margarita, CA
Conshohocken, PA
Huntington Beach, CA
Arlington, VA
South Orange, NJ
Springfield, VA
Fairfax, VA
Stevenson Ranch, CA
San Francisco, CA
Temecula, CA
Rancho Cucamonga, CA
Houston, TX
Houston, TX
Washington, D.C.
San Diego, CA
San Diego, CA
Austin, TX
Austin, TX
Phoenix, AZ
Boston, MA
Fort Worth, TX
Valencia, CA
Net Cost2
Net Fair Value
11,338
176,978
11,154
11,535
56,458
61,637
32,299
34,906
26,575
160,658
12,874
90,738
23,909
84,788
602
115,986
34,964
21,308
80,644
22,050
16,000
4,806
21,062
76,892
67,900
71,462
43,769
51,961
59,654
37,047
52,772
17,163
$3,797,070
28,300
217,557
11,238
13,261
74,629
85,179
32,407
38,971
35,049
225,732
11,560
84,348
24,996
77,404
432
164,641
56,038
22,856
105,601
19,386
14,401
4,520
23,816
75,411
69,818
73,276
47,124
59,205
30,886
74,790
53,025
19,990
$4,259,697
1
2
AS OF JUNE 30, 2013
Property Name
Year Acquired1
Location
RETAIL
Alliance Texas
Brewery Blocks
Bridgewater Commons
Deerfield Towne Center
Del Amo Fashion Center
Donahue Schriber Realty Group
Edens
Lakeside Village
Metropolitan Midtown
Ontario Mills
Park Meadows Mall
Perimeter Mall
Randhurst Village
Rookwood Portfolio
Shadow Creek Ranch Town Center
Shadow Lake Towne Center
Stony Point Shopping Center
Towson Town Mall
University Towne Center
Valley Fair Mall
Village of Merrick Park
Winter Park Village
Total Retail
2010
2007
1999
2006
2004
2002
2000
2006
2013
2004
1999
2002
1981
2007
2008
2007
2006
1999
1999
1999
2000
2006
Fort Worth, TX
Portland, OR
Bridgewater, NJ
Mason, OH
Torrance, CA
Various
Various
Lakeland, FL
Charlotte, NC
Ontario, CA
Littleton, CO
Atlanta, GA
Mt. Prospect, IL
Cincinnati, OH
Pearland, TX
Papillion, NE
Richmond, VA
Towson, MD
La Jolla, CA
San Jose Metro Area, CA
Coral Gables, FL
Winter Park, FL
1
2
Net Cost2
Net Fair Value
$13,103
50,203
27,101
91,522
171,477
539,216
516,064
23,226
58,324
90,277
–
157,967
202,292
115,868
43,723
48,892
17,683
73,211
189,884
274,042
82,424
43,900
$2,830,399
$15,499
49,957
105,286
42,096
106,982
547,941
655,001
10,885
58,027
219,863
142,962
251,896
147,363
58,940
35,137
25,540
11,672
151,611
256,134
640,319
78,967
27,719
$3,639,797
AS OF JUNE 30, 2013
Property Name
Year Acquired1
Location
LAND INVESTMENTS
Downtown Doral
Minuteman Park
Sanctuary
Woodfield Preserve
2007
2005
2000
1999
Doral, FL
Andover, MA
Alpharetta, GA
Schaumburg, IL
Total Land Investments
Net Cost2
Net Fair Value
$58,485
4,980
1,030
1,406
$36,126
2,271
697
1,259
$65,901
$40,353
OTHER INVESTMENTS
Brewery Blocks
CM Doral Development Portfolio
Park Lane Seaport Garage
Total Other Investments
2007
2006, 2010
2010
Portland, OR
Doral, FL
Boston, MA
$48,411
28,583
26,832
$103,826
$36,908
17,386
32,119
$86,413
MORTGAGE RECEIVABLES
Lakeshore East Land Loan
NorthPark Center
Total Mortgage Receivables
2011
2011
Chicago, IL
Dallas, TX
$30,301
95,453
$125,754
$30,284
95,443
$125,727
$16,802,354
$18,680,490
$539,973
171,264
$711,237
$539,973
171,264
$711,237
$17,513,591
$19,391,727
Total Investments in Real Estate Assets
CASH AND CASH EQUIVALENTS
JPMorgan Chase Bank, N.A. Liquidity Fund
Operating Cash
Total Cash and Cash Equivalents
Total Investments
1
2
Notes to Financial Statements
Description and Basis of Presentation
Investment Valuation
The Commingled Pension Trust Fund (Strategic Property) of
JPMorgan Chase Bank, N.A. (the “Fund”) is designed as a funding
vehicle for tax-qualified pension, profit-sharing and employee
benefit plans. Its investments are composed primarily of real
estate investments owned directly or through partnership
interests. JPMorgan Chase Bank, N.A. (“JPMC”) is the trustee of
the Fund (the “Trustee”).
Estimated fair value of net equity investments in real estate
assets, which includes working capital of the underlying
investments, are determined by the Trustee at each valuation
date and the fair value of the Fund’s interest in these investments
is based on its proportionate ownership.
The accompanying unaudited financial statements should be read
in conjunction with the audited Annual Report as of September
30, 2012. Operating results for the nine-month period ended June
30, 2013 are not necessarily indicative of results that may be
expected for the year ending September 30, 2013.
Revenue Recognition
The Fund’s income from investment properties is recorded in
accordance with the equity method of accounting and expenses
are recorded when incurred. Unrealized gains and losses are
computed using the cost of the investments and their fair
value. Since the Fund records its investments at fair value, no
depreciation or amortization expense on real property interests
is recognized. Interest income from mortgage loans receivable
is recognized as revenue when earned in accordance with the
terms of the underlying loan agreement which approximates
the effective interest method. Loans in default are placed on
non-accrual status. While on non-accrual status, loans are
either accounted for on a cash basis, in which interest income is
recognized only upon actual receipt, or on a cost recovery basis,
in which receipts reduce carrying value, based on the Trustee’s
judgment as to collectability of principal.
Fair value is defined as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. There
are three valuation techniques that can be used to value
investments in real estate assets: the market, income or cost
approach. The appropriateness of each valuation technique
depends on the type of asset or business being valued.
As part of the Trustee’s valuation process, properties are
externally appraised generally on an annual basis, conducted
by reputable, independent appraisal firms, and signed by
appraisers that are members of the Appraisal Institute, with
the professional designation MAI. In addition, the Trustee may
cause additional appraisals to be performed as warranted by
specific asset or market conditions. All external appraisals
are performed in accordance with the Uniform Standards of
Professional Appraisal Practices (“USPAP”). Property valuations
and the salient valuation-sensitive assumptions of each direct
investment property are reviewed by the Trustee quarterly and
values are adjusted if there has been a significant change in
circumstances related to the investment property since the last
valuation. Value adjustments for interim capital expenditures
are only recognized to the extent that the valuation process
acknowledges a corresponding increase in fair value. The
Trustee’s valuation methodology utilized in determining fair
value is consistent with GAAP and the practices prevailing
within the real estate appraisal and real estate investment
management industries. Key inputs and assumptions used to
determine fair value include among others, rental revenue and
expense amounts and related revenue and expense growth
rates, terminal capitalization rates and discount rates.
The fair value of mortgage loans payable for investment level
debt is considered in connection with the valuation of net equity
investments in real estate assets. Estimated fair values are
N OT E S TO F I N A N C I A L STAT E M E N T S
derived using original term borrowing rates in conjunction with
market oriented leveraged equity yields available at respective
valuation dates, which are Level III inputs. The discounted cash
flow method is used, which applies certain key assumptions
including market interest rates, interest spreads, credit risk
and liquidity and other factors. As investment properties are
accounted for under the equity method of accounting, the
estimated fair values of investment level debt are embedded
in the fair values of the investment properties, which are
recorded in “Investment in real estate assets at fair value” on the
statement of net assets. At times, the Fund may assume debt in
connection with the purchase of real estate.
Estimated fair value of investments in mortgage loans receivables
are derived quarterly using the discounted cash flow method,
which applies certain key assumptions. These assumptions
include market interest rates, interest spreads, credit risk and
liquidity. Additionally, the Fund considers the underlying collateral
supporting each mortgage loan investment.
The Trustee will also estimate the fair value of the Fund’s
investments in privately held closed end funds based upon the
Fund’s share of the investments’ fair values using information
provided in the investments’ reporting on a quarterly basis.
In the opinion of the Trustee, these estimated values are
reasonable approximations of fair value as of June 30, 2013.
The estimate of fair value may vary significantly from the price
achieved in a sale and this difference may be material to the
financial statements.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires the Trustee to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Participant Withdrawal Policy
Fund participants may withdraw from the Fund once per quarter
subject to available cash, as determined by the Trustee. A written
withdrawal request is required 45 days prior to quarter end.
To the extent that withdrawal requests exceed available cash,
distributions are made on a pro rata basis. Available cash is
defined as excess cash after provision for outstanding future
capital commitments and other operating reserves.
During the three months and nine months ended June 30, 2013,
approximately $258 million and $574 million were withdrawn by
investors, respectively. Subsequent to June 30, 2013, a further
withdrawal of $210 million was made in July 2013. As of August
15, 2013, there are no outstanding requests.
Income Taxes
The Fund is generally exempt from Federal income taxes under
provisions of section 501(a) of the Internal Revenue Code.
Uncertain tax positions are assessed by the Trustee to determine
whether a tax position of the Fund is more likely than not to be
sustained upon examination, including resolution of any related
appeals or litigation processes, based on the technical merits of
the position. For tax positions meeting the more likely than not
threshold, the tax amount recognized in the financial statements
is reduced by the largest benefit that has a greater than fifty
percent likelihood of being realized upon ultimate settlement
with the relevant taxing authority. As of June 30, 2013, there are
no uncertain tax positions recorded in the financial statements.
The Fund files tax returns as prescribed by the tax laws of the
jurisdictions in which it operates. In the normal course of business,
the Fund is subject to examination by federal, state, local, and
foreign jurisdictions, where applicable.
The Fund classifies interest and penalties relating to uncertain
tax positions in “general fund expenses” on the statement
of operations. There were no interest or penalties related to
uncertain tax positions for the three months and nine months
ended June 30, 2013.
Cash and Cash Equivalents
Cash and cash equivalents held in the Fund include investments
in the J.P. Morgan Chase Bank, N.A. Liquidity Fund and through
other financial institutions. These investments consist of
short-term marketable securities such as Treasury bills and
commercial paper.
Related Parties
J.P. Morgan Investor Services Co., an affiliate of the Trustee,
provides administrator services to the Fund.
Administrator service fees are not charged to the Fund
and accordingly are not reflected within the Fund’s
financial statements.
Investment management fees are charged directly to investors
in the Fund and accordingly are not reflected within the Fund’s
net asset value.
The Fund enters into real estate partnerships with various
joint venture partners that provide management, leasing and
construction-related services to the properties in which the Fund
has an ownership interest.
Fund Investments
The authoritative guidance for fair value measurements
defines fair value, expands disclosure requirements and
specifies a hierarchy of valuation techniques based on whether
the inputs to those valuation techniques are observable or
unobservable. Observable inputs reflect market data obtained
from independent sources, while unobservable inputs reflect
the Fund’s market assumptions.
These two types of inputs create the following fair value hierarchy:
Level I—Quoted prices for identical instruments in active markets.
Level II—Quoted prices for similar instruments in active markets;
quoted prices for identical or similar instruments in markets
that are not active; and model-derived valuations in which all
significant inputs and significant value drivers are observable in
active markets.
Level III—Valuations derived from valuation techniques in
which one or more significant inputs or significant value
drivers are unobservable.
This hierarchy requires the use of observable market data,
when available, and minimizes the use of unobservable
inputs when determining fair value.
Market price observability is impacted by a number of factors,
including the type of investment and the characteristics specific
to the investment. Investments with readily available active
quoted prices or for which fair value can be measured from
actively quoted prices generally will have a higher degree of
market price observability and a lesser degree of judgment used
in measuring fair value.
In certain cases, the inputs used to measure fair value may
fall into different levels of the fair value hierarchy. In such
cases, an investment’s level within the fair value hierarchy
is based on the lowest level of input that is significant
to the fair value measurement. The Fund’s assessment
of the significance of a particular input to the fair value
measurement in its entirety requires judgment, and considers
factors specific to the investment.
As of June 30, 2013, all investments are measured at fair
value on a recurring basis using Level III inputs. See below
for a reconciliation of the assets and liabilities measured at
fair value on a recurring basis using Level III inputs during
the three and nine months ended June 30, 2013.
FAIR VALUE MEASUREMENTS FOR THE THREE MONTHS ENDED JUNE 30, 2013
Beginning balance, April 1, 2013
Net realized and unrealized gain
Acquisitions/Contributions
Dispositions/Distributions
Ending Balance, June 30, 2013
Unrealized gain for the period relating to investments still held at June 30, 2013
Investments in
Real Estate
$17,450,660
476,198
244,688
947,060
(438,116)
$18,680,490
$458,616
FAIR VALUE MEASUREMENTS FOR THE NINE MONTHS ENDED JUNE 30, 2013
Investments in
Real Estate
$16,390,582
1,142,578
701,560
1,835,218
(1,389,448)
$18,680,490
Beginning balance, October 1, 2012
Net realized and unrealized gain
Acquisitions/Contributions
Dispositions/Distributions
Ending Balance, June 30, 2013
Unrealized gain for the period relating to investments still held at June 30, 2013
Real Estate Investments
The following is a combined summary of financial position and
results of operations of real estate investments as of and for the
three and nine months ended June 30, 2013. The Fund’s share of
net assets is presented within “Investments in real estate assets
at fair value” on the Fund’s statement of net assets as of June 30,
2013 and the related share of net investment income is presented
within “Income from investments in real estate assets” on the
statement of operations for the three and nine months ended
June 30, 2013.
Real Estate Investments Assets and Liabilities
Real estate at fair value
Other assets
Total assets
Mortgage loans payable at fair value
Other liabilities
Total liabilities
Net assets
Fund’s share of net assets
Real Estate Investments Operations
Total rental and other revenues
Real estate taxes and expenses
Fund’s share of net
investment income
$36,198,813
407,233
36,606,046
10,573,795
432,230
11,006,025
$25,600,021
$18,680,490
For the Three
Months Ended
June 30, 2013
$716,510
383,566
$332,944
For the Nine
Months Ended
June 30, 2013
$2,097,807
1,138,616
$959,191
$244,688
$701,560
Investment Level Debt
The Fund’s share of fixed and floating mortgage loans had a fair
value of approximately $6.6 billion, with an outstanding principal
balance of approximately $6.5 billion. Different assumptions or
$1,049,442
changes in future market conditions could significantly affect
estimated values. The total recourse on the Fund’s share of joint
venture debt as of June 30, 2013 was $24 million. At June 30,
2013, the weighted average interest rate based on outstanding
principal was 4.5%.
The five-year principal repayment schedule is as follows:
AS OF JUNE 30, 2013
DOLLARS IN MILLIONS
For the fiscal years ending September 30,
2013
2014
2015
2016
2017
Thereafter
Total
Fund’s Share
627
488
812
618
706
3,229
$6,480
Percent
9.7%
7.5%
12.5%
9.5%
10.9%
49.9%
100.0%
Line of Credit
In August 2011, the Fund entered into an unsecured revolving
credit facility (the “Facility”) from an unrelated financial institution,
with a borrowing capacity of $400 million. The Facility is for a two
year term, with a one year extension option. The Facility contains
restrictive covenants that, among other matters, require the Fund
to maintain certain financial ratios. As of June 30, 2013, the Fund
was in compliance with all restrictive covenants.
On June 28, 2013, the Facility was amended to include a
Subsidiary Borrower (425 Lexington Realty Company LLC) and
$214.4M was borrowed under the Facility. The outstanding balance
of $214.4M is embedded in the fair value of the investment
property which is recorded in “Investments in real estate assets
at fair value.” Subsequently, on August 1, 2013, the outstanding
balance of $214.4M was paid off.
Concentration of Risk on Direct
Real Estate Investments
At June 30, 2013, the Fund had real estate investments located
throughout the United States and invested in four property types.
The distribution based on the estimated fair values within the
NCREIF regions and by property types are as follows:
AS OF JUNE 30, 2013
DOLLARS IN MILLIONS
REGION
SECTOR
Northeast
Mideast
Southeast
Southwest
NE Central
NW Central
Mountain
Pacific
Total
Fair Value
$3,749.9
2,036.3
2,060.1
2,363.2
778.6
25.5
648.5
6,765.9
$18,428.0
Percent
20.3%
11.1%
11.2%
12.8%
4.3%
0.1%
3.5%
36.7%
100.00%
Office
Industrial
Residential
Retail
Total
$8,925.0
1,603.5
4,259.7
3,639.8
$18,428.0
48.4%
8.7%
23.1%
19.8%
100.00%
be in the Fund’s best interest to do so. In the event the Fund is
required to liquidate all or a portion of its portfolio quickly, the
Fund may realize significantly less than the value at which it
previously recorded those investments.
The Fund has taken significant effort to minimize related risks
to the portfolio.
Commitment And Contingencies
As of June 30, 2013, the Fund does not have material
commitments and contingencies.
Financial Highlights
The following summarizes the Fund’s financial highlights for the
three and nine months ended June 30, 2013. They consist of per
unit operating performance and total return as well as Fund-level
operating expense and net investment income ratios.
Fund per share operating performance
Risk Management
Diversification risk
The assets of the Fund are concentrated in the real estate sector
which may expose the investment portfolio to more rapid changes
in value than would be the case if the Fund were to maintain a
wide diversification among investments.
Net asset value per unit at beginning of period
$1,940.84
$1,826.34
Income from investment operations
Net realized and unrealized gains
Total from investment activity
25.31
49.48
74.79
71.82
117.47
189.29
Net asset value per unit at end of period
$2,015.63
$2,015.63
3.85%
10.36%
0.01%
1.30%
0.02%
3.84%
Total return1,2
Financing risk
There is no guarantee that the Fund’s borrowing arrangements
or other arrangements for obtaining leverage will continue
to be available, or if available, will be available on terms and
conditions acceptable to the Fund. Unfavorable economic
conditions also could increase funding costs, limit access to
the capital markets or result in a decision by lenders not to
extend credit to the Fund. In addition, a decline in fair value of
the Fund’s assets may have particular adverse consequences
in instances where the Fund borrowed money based on the fair
value of those assets. A decrease in fair value of those assets
may result in the lender requiring the Fund to post additional
collateral or otherwise sell the assets at a time when it may not
For the Three
For the Nine
Months Ended Months Ended
June 30, 2013 June 30, 2013
Ratios to weighted average net assets
Fund level operating expenses2
Net investment income2
1
T otal return is calculated based on a time-weighted rate of return methodology.
Monthly rates of return are geometrically linked to derive the total return reflected above.
2
Investment Management fees are charged directly to investors in the Fund and accordingly
are not reflected within the Fund’s total return or income and expense ratios.
Subsequent Events
Except as otherwise disclosed, no material subsequent events
have occurred through August 15, 2013, the date the financial
statements were available to be issued.
Report of Independent Accountants
Report of Independent Accountants
To the Participants of the Commingled Pension Trust Fund
(Strategic Property) of J.P. Morgan Chase Bank, N.A.
We have reviewed the accompanying statement of net assets of the Commingled Pension Trust Fund
(Strategic Property) of J.P. Morgan Chase Bank (the “Fund”) as of June 30, 2013, and the related
statement of operations and changes in net assets and statement of cash flows for the three-month and
nine-month periods ended June 30, 2013. This interim financial information is the responsibility of J.P.
Morgan Chase Bank, as Trustee.
We conducted our review in accordance with standards established by the American Institute of Certified
Public Accountants. A review of interim financial information consists principally of applying analytical
procedures and making inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with auditing standards generally
accepted in the United States of America, the objective of which is the expression of an opinion regarding
the financial information taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the
accompanying interim financial information for it to be in conformity with accounting principles generally
accepted in the United States of America.
New York, New York
August 15, 2013
The Commingled Pension Trust Fund (Strategic Property) of JPMorgan Chase Bank N.A. is a collective trust fund established and maintained by JPMorgan Chase Bank, N.A. under a declaration of
trust. The fund is not required to file a prospectus or registration statement with the SEC, and accordingly, neither is available. The fund is available only to certain qualified retirement plans and
governmental plans and is not offered to the general public. Units of the fund are not bank deposits and are not insured or guaranteed by any bank, government entity, the FDIC or any other type of
deposit insurance. You should carefully consider the investment objectives, risk, charges, and expenses of the fund before investing.
This quarterly report is intended to report solely on the investment strategies and opportunities of the JPMorgan Chase Bank, N.A. Strategic Property Fund (“the Fund”). Additional information
is available upon request. Information herein is believed to be reliable, but J.P. Morgan Asset Management does not warrant its completeness or accuracy. Opinions and estimates constitute our
judgment and are subject to change without notice. Past performance is not indicative of future results. Total return assumes the reinvestment of income. Indices are not available for actual
investment and are provided for illustrative purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The investments and strategies
discussed herein may not be suitable for all investors; if you have any doubts you should consult your J.P. Morgan Asset Management Client Advisor or Portfolio Manager. The material is not intended
to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. You should consult your tax or legal adviser about the issues discussed herein. Indices do
not include fees or operating expenses and are not available for actual investment. The investments discussed may fluctuate in price or value. Investors may get back less than they invested. Changes
in rates of exchange may have an adverse effect on the value, price or income of investments.
Real estate investing may be subject to a higher degree of market risk because of concentration in a specific industry, sector or geographical sector. Real estate Investing may be subject to risks
including, but not limited to, declines in the value of real estate, risks related to general and economic conditions, changes in the value of the underlying property owned by the trust and defaults
by borrower.
It should not be assumed that Fund positioning in the future will be profitable or will equal past performance.
J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. and its affiliates worldwide. Those businesses include, but are not limited to,
JPMorgan Chase Bank, N.A., J.P. Morgan Investment Management Inc., Security Capital Research & Management Incorporated, and J.P. Morgan Alternative Asset Management, Inc.
© JPMorgan Chase & Co., 2013
J.P. Morgan Asset Management—Global Real Assets
270 Park Avenue l New York, NY 10017
jpmorgan.com/assetmanagement
Portfolio Management Team—JPMCB Strategic Property Fund
Anne S. Pfeiffer
Managing Director
Senior Portfolio Manager
Tel: +1-212-648-2176
Fax: +1-212-648-2261
[email protected]
Kimberly A. Adams
Managing Director
Portfolio Manager
Tel: +1-312-732-6366
Fax: +1-312-732-6391
[email protected]
Ann E. Cole
Managing Director
Portfolio Manager
Tel: +1-212-648-2152
Fax: +1-917-464-7449
[email protected]
Fund Relations Team
Julia K. Wong
Executive Director
Fund Relations
Tel: +1-212-648-2173
Fax: +1-917-464-8734
[email protected]
Nicholas D. Hauser
Associate
Fund Relations
Tel: +1-212-648-1725
Fax: +1-212-648-2261
[email protected]
Hannah Kim
Analyst
Fund Relations
Tel: +1-212-648-1349
Fax: +1-212-648-2261
[email protected]
Alexis Sowuleski
Analyst
Fund Relations
Tel: +1-212-648-2119
Fax: +1-212-648-2261
[email protected]
Client Relations and Strategy Team
Michael F. O’Brien
Managing Director
Global Head of Real Assets Client Relations
and Strategy
Tel: +1-212-648-2180
Fax: +1-212-648-2261
[email protected]
J.D. Sitton
Managing Director
Head of Real Estate Americas Client Relations
and Strategy
Tel: +1-212-648-2163
Fax: +1-212-648-2261
[email protected]
John F. Faust
Managing Director
Client Relations and Strategy
Tel: +1-415-315-5164
Fax: +1-415-315-5195
[email protected]
Rebekah Brown
Executive Director
Tel: +1-212-648-2041
Fax: +1-212-648-2261
[email protected]
Amy C. Cummings
Executive Director
Tel: +1-415-315-5177
Fax: +1-415-315-5195
[email protected]
Michael J. Duignan
Executive Director
Tel: +1-212-648-2122
Fax: +1-212-648-2261
[email protected]

JPMCB Strategic Property Fund - CFRS

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